GEORGE OSBORNE
RECENTLY DELIVERED HIS
FIRST FULL BUDGET of the
current Parliament. In his own words
he described this as a Budget for
the next generation, with a repeated
theme of “act now, so we don’t pay
later”.
In this article I will detail the changes
resulting from
this Budget
and how they
may affect
you and your finances.
Overall
there were no
great surprises
or shocks
in the recent Budget and happily no
more changes to the current pension
legislation other than a few small
amendments to the pension tax
rules, to ensure that they operate as
intended following the introduction
of pension flexibility in April 2015.
There was good news for investors
as Capital Gains Tax (CGT) rates will
fall, but not for landlords. Investors
who own funds or shares will bene t
from a CGT cut from 6th April this
year, and the new rates are 10% where
an individual is not a higher rate tax payer or 20% where the investor is a
higher rate tax payer or the gain takes
them into the higher rate band.
Trustees and legal personal
representatives also see their tax rate
fall to 20%. However, landlords or
second property owners will continue
to pay 18% or 28% on any gains when
they come to sell.
This
measure,
together with
the higher
rates of Stamp
Duty that had
already been
announced
on purchases
of additional
residential properties, is designed to try to redress
the balance between those who are
struggling to buy their first property
and those who are able to invest in
additional properties. The rates of
Stamp Duty will be 3% above the
current rates, and will take effect from
1st April 2016.
There were also some welcome
announcements about ISAs. Although
the ISA limit will remain at the current
level of £15,240 for the 2016/2017 tax
year, from April 2017 it will increase to
£20,000.
There will also be a new Lifetime
ISA (LISA) available from April 2017
for savers aged between 18 and 40.
Any savings made into the plan before
age 50 will attract a 25% bonus from
the government – provided the funds
are used either to purchase a first
home or not withdrawn until after 60
(i.e. for retirement).
Contributions may continue after
age 50 but the government bonus
will only be applied to contributions
made before the saver’s 50th birthday.
The bonus will be added to the fund
at 50 but will be lost if the funds are
withdrawn before the saver’s 60th
birthday or before their first time
property purchase.
The maximum contribution will
be £4,000 per year with the total
maximum contribution to the plan
over a lifetime being £128,000.
Contributions to the Lifetime ISA
must be within the overall ISA limit
(£20,000 from 2017/18). Individuals
can contribute into a Lifetime ISA
alongside other ISAs in one tax year
provided they remain within the
£20,000 annual limit.
Savers can withdraw their funds at
any time tax-free but will not receive
the government bonus and will incur
a 5% charge if the withdrawal is not
for the purchase of their first property
or after they turn 60 (unless they are
diagnosed with terminal ill health as
per current pensions legislation).
This appears to be one of the
pension changes the Chancellor had
been looking to make, eased in under
ISA rules and initially to run alongside
the current pension system.
For young savers with one eye on
a potential property purchase, this
may be the preferred option to the
more traditional route of pension
saving. It will be interesting to see
whether similar flexibilities are offered
to pension plans in the coming years
and also whether the opt-out rate
among young people from Workplace
Pensions increases.
But this is a complementary savings
scheme for younger savers, not a
replacement for traditional pension
saving. Higher-rate tax payers will
continue to enjoy tax relief at 40% on pension savings of up to £40,000
a year, keeping pensions as their
number one long-term savings plan.
Indeed, the under-40s will be able to
use both and add up to £45,000 per
year to their retirement funds.
In more good news for employers
and employees, the Government has
confirmed that salary sacrifice will
continue to be a tax-efficient and NI-
efficient option for funding a pension
(as well as other mainstream employee
benefits, such as childcare or health-
related provision). Its use for other employee benefits may, however, be
cut back.
From April 2018, self-employed
individuals will no longer have to
pay Class 2 National Insurance
contributions, which are currently
£2.80 per week. They will still have
to pay Class 4 NI, which will be
reformed to allow them to build up
an entitlement to State Pension.
As an encouragement to UK
business the Corporation Tax rate
will be further cut to 17% from 2020,
from its current rate of 20%.
And as a reminder of what we
already knew was coming in 2016/17,
the pension lifetime allowance is
to be cut from £1.25 million to £1
million, with new protection options
for those expecting to be caught.
In addition, the standard £40,000
Annual Allowance for pension
contributions will be reduced by £1
for every £2 of “income” you have
over £150,000 in a tax year, until the
allowance drops to £10,000.
A reminder about personal
savings and dividend
allowances
While this was not a new
development in the recent Budget,
it is worth remembering that from
6th April 2016 savers are no longer
subject to the 20% tax deduction on
interest on savings accounts in banks
or building societies.
There will be a new Personal
Savings Allowance (PSA), which will
allow savers to earn interest of up to
£1,000 per year tax-free. Higher rate
tax payers will only have a PSA of
£500 and additional rate tax payers
will not have any PSA.
Banks will no longer deduct tax
at source so, if you exceed your
PSA, you will have to pay tax on the
interest over the allowance: 20% if
you are a basic rate tax payer or 40%
if you are a higher rate tax payer.
Banks will notify HMRC that you
have exceeded your allowance and
the tax will usually be collected by
altering your tax coding.
Those who receive dividend
income will also face a new tax
regime, with dividends below £5,000
becoming tax-free. Above this level,
basic-rate tax payers will pay 7.5%,
while those in the higher rate will pay
32.5% and additional rate tax payers
38.1%.
Many investors will not exceed the
limit but shareholding directors who
take a large amount of income as
dividends will see the impact of this
affect their tax liability.
HMRC will need to be notified if
dividend income exceeds £5,000 as –
unlike the PSA – banks or investment firms will not do this.
